BEPS Action Plan 10: Low value-adding services

SUITS THE C-SUITE By Auresana I. Torres

Business World (12/07/2015 – p.S1/2)

(Second of two parts)

In last week’s column, we started our discussion on Base Erosion and Profit Shifting (BEPS) Action Plan 10, which seeks to align transfer pricing outcomes to value creation by providing protection to payor-countries against base-eroding payments and prescribing additional rules on the applicability of the profit split method.

BEPS Action Plan 10 also introduces changes and clarifications on intra-group services, amending certain paragraphs of Chapter VII of the Organisation of Economic Co-operation and Development (OECD) Transfer Pricing (TP) Guidelines and adding a new section for low value-adding services. Intra-group services include any activity (e.g., administrative, technical, financial, commercial, etc.) which an independent enterprise would have been willing to pay or perform for itself. Examples include manufacturing or assembly, contract research activities, and the administration of licenses. A new category of intra-group services that has been introduced under BEPS Action Plan 10 is the low value-adding intra-group services. This additional category is different in that there is an elective and simplified approach that taxpayer and tax administrations may resort to in determining an arm’s length charge for such services.


“Low value-adding intra-group services” are defined as services performed by one or more than one member of a Multinational Entity (MNE) group on behalf of one or more other group members which:

· Are of a supportive nature;

· Are excluded in the core functions of the MNE group (i.e., not part of the profit-earning activities or contributing to economically significant activities of the MNE group);

· Do not require the use of unique and valuable intangibles and do not lead to the creation of unique and valuable intangibles; and

· Do not involve the assumption of control of substantial or significant risk by the service provider and do not give rise to the creation of significant risk for the service provider.

Examples of these services include backroom support services, such as a) accounting and auditing services; b) HR services; c) IT services, when they are not part of the principal activity of the group; d) legal services; e) activities with regard to tax obligations, which include preparation of tax returns; and g) general services of an administrative or clerical nature.

However, the following services do not qualify as low value-adding services: a) Research & Development services, including software development; b) manufacturing and production services; c) purchasing activities relating to raw materials or other materials that are used in the manufacturing or production process; d) sales, marketing and distribution activities; e) financial transactions; f) extraction, exploration or processing of natural resources; g) insurance or reinsurance; and h) services of corporate senior management (other than management supervision of services that qualify as low value-adding services).


If the intercompany transaction involves the provision of low value-adding services, an MNE group may opt to adopt a simplified approach to determine an arm’s length charge for such services. This approach involves pooling of all costs incurred by all members of the MNE group in performing each category of the low value-adding services and then, applying a uniform mark-up of 5%. In this case, the 5% mark-up does not have to be justified by a benchmarking study.

In determining the costs to be pooled, the MNE group calculates, on an annual basis, all the costs incurred according to the category of services. The costs to be pooled are the direct and indirect costs of rendering services and, where relevant, the appropriate part of operating expenses. All costs that are attributable to services performed solely for a particular MNE member are identified and, then, excluded. What is left of the pooled costs is then allocated among members of the MNE group.

For the allocation of the costs, the taxpayer will have to select one or more allocation keys, which will depend on the nature of the services performed and must be applied consistently for all allocations of costs involving the same category of services. Some examples of allocation keys mentioned in the new rules are total group head count, total users, and total assets.


MNEs electing to use the simplified approach should prepare relevant information and documentation that should be made available by any MNE member upon request by tax administrations. These include a description of the services, the identity of the beneficiaries, a description of the benefits of each category of services, written contracts or agreements, calculations of the cost pool, and calculations showing the application of the specified allocation keys.

The new rules suggest that tax administrations may provide for a threshold, which when breached, may justify denial of the application of the simplified approach, and require a full functional analysis, comparability analysis, and the application of the benefits tests to specific service charges. Further work is being done on the implementation of the threshold and will be finalized in 2016.

Given the provisions of Action Plan 10, covered MNEs may consider the new rules on commodity transactions and low-value adding services in their future transactions as well as in their TP policies and corresponding TP documentation. By taking into account the simplified approach to determine an arm’s length charge and the preferred pricing methods, tax issues that may be raised on related party transactions upon audit will hopefully be better managed and quickly resolved.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Auresana I. Torres is a Tax Senior Director of SGV & Co.